KARACHI, May 1: The treasury bills auction due on Thursday is going to remove uncertainty about whether the State Bank would lower the yield on treasury bills to dry up excessively liquid inter-bank market.

Bankers say the T-bills auction due on Thursday is crucial as the market has an estimated surplus liquidity of Rs8-10 billion which means that the banks may lower the bid prices for buying T-bills. The SBP has set the pre-auction target at Rs22 billion as an inflow of the same amount is due through maturity of the T-bills sold earlier.

“The auction is very crucial,” treasurer of a local bank told Dawn on Tuesday. “What is to be seen is that whether the State Bank lowers the yield on T-bills to mop up more than targeted amount or it just sticks to the pre-auction target keeping the cut-offs unchanged.”

What makes bankers believe that the central bank will have to lower the yield to siphon off more than targeted liquidity from the market is that an excessively liquid market is sure to bid at lower prices. Opinions are divided about whether bids would be priced at the previous levels up to Rs22 billion. Some bankers think that bid prices should be in the vicinity of the previous cut-offs up to Rs22 billion and additional bids would be priced at lower rates. But others think banks may price their bids lower than the previous levels even within the range of Rs22 billion.

If this happens to be the case then the SBP will really find it difficult to mop up the targeted amount of excess liquidity without letting the cut-offs slip by. But if the bids are priced at the previous levels up to Rs22 billion then the SBP may suck in the matching inflow but fail to mop up more than targeted liquidity. “What suits the central bank would become clear on Thursday,” said treasurer of a foreign bank. “But my own feeling is that the SBP would not mind, leaving some surplus liquidity in the market because that is necessary to facilitate the ongoing rate-cuts by banks.”

Some bankers say that the central bank may even allow the cut-offs fall a few basis points in its effort to mop up as much liquidity as is possible. They say this would reinforce earlier SBP signals that it wants the ongoing rate-cuts to continue and would also keep excess liquidity in the market within manageable limits.

Senior bankers say on Tuesday the market was surplus by Rs8-10 billion with overnight call rates lying flat at 2-3 per cent against the discount rate of 9 per cent. They say the market has been excessively liquid since last week with call rates ranging between one and three per cent but the SBP has refrained from holding open market operations to dry up the market to the extent that the rates are stabilized.